Canara Bank Moving into a higher trajectory:: RBS

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄


Canara Bank
Moving into a higher trajectory
Canara Bank surprised positively on core earnings in 2QFY11. Strong net interest
income growth with negligible treasury gains took the bank’s operating
performance to a higher trajectory. We raise our earnings forecasts and upgrade
to Buy with a new target price of Rs746 (from Rs523).


2QFY11: strong net interest income growth
Net interest income grew 53% yoy (up 16% qoq) on the back of 20% yoy loan growth (up
1.3% qoq), driven by about 50bp yoy margin expansion to 3.16% (up 15bp qoq). Margin
expansion qoq was largely driven by 26bp improvement in yields, even as the cost of
deposits remained stable. However, core fee income growth (up 12% yoy in 2Q, up 3% yoy
in 1HFY11) remains largely muted. Treasury gains were negligible vs Rs 4.4bn in 2QFY10
(39% of PBT; see Chart 3). The provision charge for non-performing loans (NPL) was 11bp
in 2Q (21bp in 1HFY11). On balance, net profit of Rs10.1bn was much higher than we had
forecast.

Asset quality seems stable; consistent high cash recovery provides comfort
Asset quality largely remained stable on a qoq basis in 2QFY11. The cash recovery from bad
loans (classified as NPLs) was Rs7.4bn in 1HFY11 (29% of opening gross NPLs). Canara
Bank continues to show healthy cash recovery from bad loans. The cash recovery as a
proportion of opening gross NPLs was 73% in FY10 and about 100% in FY09. We expect
asset quality to remain largely stable going forward. Our estimates factor in a 61-88bp loan
loss charge in FY11-13 (89bp in FY10).

Relatively high proportion of loans to infrastructure, but no apparent risks
Infrastructure loans constituted about 22% (see Chart 2) of the loan book as of September
2010 vs 17% as of September 2009 and 23% as of June 2010. These figures are high
relative to peers (13% as of May 2010). According to management, the CASA ratio (about
30%, see Chart 4) lessens the asset liability management (ALM) risk. However, we note that
the CASA ratio at Canara Bank is lower than at peers (35-38%).

We raise our earnings forecasts and roll forward our valuation: up to Buy, TP Rs746
We raise our FY11/12F net profit 16%/11% (led by core earnings), roll forward our Gordongrowth-
based valuation to FY12 and set a Rs746 TP. We upgrade to Buy. At our target price,
Canara Bank would trade at 7.1x FY12F earnings and 1.8x FY12F adjusted book value.